Deal intentions remain above trend

Global Capital Confidence Barometer | Life Sciences | 17th edition

Sixty percent of life sciences executives see the M&A market improving in 2018, based on their responses to our 17th Capital Confidence Barometer.

While 2017’s total deal value will rank among the top five ever for life sciences the M&A market was not without its challenges. A delay in US tax and health care policy reform, as well as rising equity prices, slowed US domestic and inbound activities. However, medtech consolidation and resilient ex-US activity offset the potential slow down. Life sciences companies have continued to make deals and are approaching a “new normal” of US$200 billion.

US companies deployed their offshore cash, while both funds and corporates from Asia became more active. European deal activity has remained relatively constant despite ongoing Brexit uncertainty.

Favorable changes to the regulatory environment, such as accelerated drug approval and foreign clinical trial acceptance, helped China leapfrog into second place over Germany as a top investment destination compared to six months ago.

With recent more favorable US tax legislation imminent, life sciences executives have reason to be opportunistic — 60% expect to pursue M&A in the next 12 months compared to 46% in April. Similarly, executives’ outlook for corporate earnings, credit availability and equity valuations have all increased.The perennial inorganic growth drivers, such as patent expirations, payer pricing pressures and intensifying competition within therapeutic areas, will continue to propel M&A in 2018.

The need for business model innovation leveraging technology continues to be an urgent topic in boardrooms. As digitalization accelerates, 28% of executives are looking to buy, form alliances or create joint ventures with digital companies. For large life sciences companies ($5b+ in revenue) this transformation is even more pronounced, with 47% adopting this strategy.

So far, life sciences companies have preferred alliances and JVs with their technology counterparts. These initiatives will only increase as they attempt to create and participate in “beyond the pill” solutions and platforms of care. Our new report, Life Sciences 4.0: Platforms to create value coming February 2018, looks at this in detail as well as how Life Sciences companies can become more capital efficient and focus on fewer therapeutic areas.

As life sciences executives look to unleash their growing firepower (a company’s ability to do M&A based on the strength of its balance sheet and stock price) in 2018, 55% expect to see more competition for attractive assets from private equity using some of their record levels of dry powder.

For an in-depth analysis of 2017 and perspectives on what the life sciences deal market may hold in 2018, look for our latest annual M&A Outlook and Firepower Report, which we will be releasing inearly January 2018.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.